BP is pumping its way out of trouble

Bob Dudley, Group Chief Executive of BP, speaks during the 26th World Gas Conference in Paris, France, June 2, 2015. REUTERS/Benoit Tessier

LONDON (Reuters Breakingviews) - BP has almost recovered from its near-death experience in the Gulf of Mexico. The oil giant’s earnings almost tripled in the first quarter, helped by favourable oil prices and higher output. Even its hefty debt pile looks manageable provided it keeps production flowing. After seven years of pain, deliverance may be within reach.

Following a poor end to 2016 it was important for BP to deliver in the first quarter. Underlying replacement cost profit – the company’s preferred definition of net income, which excludes the bill for Deepwater Horizon – jumped to $1.5 billion, from $532 million a year earlier. Losses associated with the disaster shrunk to $161 million before tax: in the same period last year they were almost six times as large.

The company led by Bob Dudley is doing a better job of managing factors it can control, like output. That is positioning it to take advantage of things beyond its reach, such as rising crude prices. Group oil and gas output – the main engine for cash generation – was up 5 percent to almost 3.5 million barrels per day, year on year. That rate of output growth, which takes into account BP’s stake in Russia’s Rosneft, is ahead of aggressive European rival Total, which increased production by 4 percent in the first quarter.

Provided it can keep the crude gushing, BP can generate enough operating cash to pay compensation for the April 2010 disaster and keep its sizable pile of debt under control. Fines and compensation payments sucked $2.3 billion out of BP’s operating cashflow in the quarter – more than double the amount in the same period of last year. As a result, net debt climbed to $38.6 billion at the end of March, from $35.5 billion in December, pushing BP closer to busting its target leverage ceiling of 30 percent of equity.

Those payments will moderate from 2018, however, helping to take the pressure off BP’s balance sheet and freeing up more cash for new projects - and increased dividends. Shareholders who have endured years of uncertainty since the oil spill will be counting on BP to keep on pumping.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.